Saturday, September 19, 2009

China’s Defense Industry Benefits From Foreign Commercial Deals

Just how big are China’s top defense manufacturers? They won’t say; not one of 20 firms responded to queries for the Defense News Top 100.

But these major companies, all controlled by the Chinese Communist Party in Beijing, are big and getting bigger, and more sophisticated as well — thanks in part, some analysts say, to Western commercial aviation contracts.

Most of the firms are subsidiaries of the eight-year-old China Aviation Industry Corp (AVIC). AVIC is divided into two divisions, AVIC I and II. The more predominately military of the two divisions, AVIC I describes itself as an ultra-large, state-owned enterprise with 240,000 employees that has mass-produced fighters, bombers, trainers and reconnaissance aircraft. It controls 47 manufacturing facilities, 31 research-and-development institutions, and 22 specialized companies, including Shenyang Aircraft Corp., Chengdu Aircraft Corp., Xi’an Aircraft Corp. and Shanghai Aviation Industrial Corp.

Each year, AVIC I and II firms export commercial and civil airplane parts worth hundreds of millions of dollars.

In 2004, the 56-year-old Shenyang Aircraft — dubbed “the cradle of China’s jet fighter aircraft” for its more than 20 models of aircraft, including the J-6 Farmer and J-8 Finback fighters — exported commercial parts worth $300 million to Airbus, BAE Systems, Boeing and De Havilland.

The same year, Chengdu Aircraft, which has built more than 2,500 planes of more than 10 types, including the recent Xiaolong (Fierce Dragon) fighter, posted more than $100 million in commercial exports. Its contracts included the assembly of MD-80/90 nose sections, Boeing 757 empennage, A320 rear passenger door and the No. 3 fuel tank for Dassault F-2000EX business aircraft.

And the deals keep coming. In June, Boeing signed contracts worth $500 million with four AVIC I and II subsidiaries to produce components for the 747 and the new 787 Dreamliner. Xi’an Aircraft will produce in-board wing flaps for the Boeing 747 and Hafei Aviation Co. will supply composite parts. And Tianjin-based BHA Aero Composites, a joint venture between AVIC I, Hexcel, and 40-percent partner Boeing, will supply composite panels for the 787 vertical fins.

Chengdu, which builds forward-entry and overwing-exit doors for the Next-Generation 737, will make ailerons and spoilers for the 747. It was selected as a 787 supplier in 2004, and on June 28, the first CAC-built composite 787 rudder came off the floor and headed for Everett, Wash., for installation on the first 787, to be delivered in 2008. On July 2, Bombardier Aerospace announced a joint venture with AVIC I to develop 90- and 149-seat versions of the ARJ21-900 commercial aircraft, set to begin production this year and enter service in 2011.

Wang Yukui, with communications for Boeing (China) Co., responded by arguing that none of the commercial contracts Boeing has with China have military applications.

“Boeing develops explicit contract language guiding the scope of work for commercial aircraft manufacturing requirements,” Wang said. “These contracts outline how the commercial components/ parts will be manufactured and to what specifications. All exports of the requirements and specifications are in compliance with U.S. export regulations. Boeing complies with all U.S. export regulations and works closely with the U.S. government to ensure that controlled U.S. technology exported by Boeing is licensed as required.”

Know-How Transfer

Larry Wortzel, a member of the U.S.-China Economic and Security Review Commission, said such deals are helping the Chinese defense industry improve where it has long lagged: in management, innovation, and quality control. He stated that in April he met the management and engineering team from the Chinese factory that makes General Electric wind-turbine generators.

“These guys have absorbed the GE culture, ‘six sigma’ management and leadership, and are part of a global team that operates in the U.S., Italy and China,” Wortzel said. “This stuff will have amazing spinoffs for Chinese industry. That will also happen in electronic, aviation, and other areas of materials and metallurgy. So when AVIC does parts of commercial aircraft, the quality control and management techniques will transfer over into military aircraft.”

Richard Fisher, vice president of the Washington-based International Assessment and Strategy Center, agrees.

“The ultimate goal for the PLA [People’s Liberation Army] remains to become an independent innovator and producer of high-tech weapons,” he said. “In almost all areas, the PLA has benefited from foreign technology inputs.”

Fisher said China has learned almost all it can from Russia, long the country’s biggest foreign arms supplier.

“For this reason, the PLA will push harder to break the European Union arms embargo seeking a new period of military-technical collaboration with European firms. The PLA would like to replicate the Eurocopter EC-175/Z-15 co-development/ production program with a full range of European defense firms,” he said.

China is beginning to compete in the international defense market, offering prices and even good quality, Fisher said.

“The Chinese Type 039 submarine is comparable to early versions of the French Agosta class, but can be had for about $100 million less, and is being marketed to Thailand now,” he said. “China is also promoting a version of its Type 071 LPD to Malaysia which costs about one-third the price of the U.S. San Antonio-class LPD. At about $15 million to $25 million, the Chengdu FC-1 supersonic multirole fighter will have no competition from new fighters in this same class from Russia or the West.

“And should China begin to export its new High Power Microwave or anti-ship ballistic missile weapons to ‘friends’ like Iran or Venezuela, these states would gain profound asymmetric advantages against the United States.”

Richard Bitzinger, senior fellow, Institute of Defence and Strategic Studies, S. Rajaratnam School of International Studies, Singapore, is less convinced that civil and commercial work has helped China’s arms makers.

“I think it is still very unclear how much the Chinese defense industry — particularly the aircraft sector — has gotten from doing civil subcontracting work (for companies such as Boeing and Airbus),” he said.

But Bitzinger does not dispute that the Chinese defense industry is improving.

“Overall, the Chinese have spent more than a decade buying modern machinery, computer-aided design and manufacturing technologies, and the like, and like I say, it seems to be finally paying dividends,” he said.

Such concerns seem unlikely to slow the pace of such deals anytime soon.

According to Boeing’s China Website, “China and Boeing have worked together successfully since 1972. Boeing has a long-term commitment to China and would like to be its preferred partner in aviation.”

Boeing estimates China will buy 2,600 airliners worth $213 billion in the next two decades, making it the world’s second-largest airliner market.